Fair Value, Insolvency and Stock Prices

Is anyone else somewhat baffled by the latest concern about the solvency of Freddie Mac and Fannie Mae and the resulting impact to its stock price? Where was all this concern back in the highs of the dot-com bubble? Those companies were most certainly insolvent - besides the cash infusions they were getting, they had zero revenues and their assets consisted, for the most part, of instantly obsolete computer hardware. So, then, why is it then that Fannie Mae's and Freddie Mac's solvency is now such headline-making news and, apparently, the basis for its volatile stock price?

It ultimately must come down to future expectations. Dot-com stock prices rose because the expected earnings of those companies continued to rise - regardless of whether those expectations are well founded. Consequently, then, it would seem as though the markets are now implying that neither Fannie or Freddie would be able to meet its debt obligations with the lower future expected revenues on the depreciating assets that it still holds. Of course, when you add-in the guarantee of the government, this adds a whole new dynamic to the mix. With that guarantee, the earnings of these two institutions become almost secondary as the government could always, then, step-in to satisfy any claims when they arose. The question remains, however, why the question over its solvency continues to be such a significant question mark.

Could it be that the markets have learned their lessons from the dot-com era and are now looking at the balance sheets of the companies in which they invest ...before they invest? It's possible, to some extent, but I think that it's actually more likely that this is just another example of the markets grabbing onto any kind of headline-making news to justify trades in either direction. Speculators, making profits on their short sales and derivative positions love volatility and Freddie and Fannie have been their best friends lately. A savvy investors should, on the other hand, question the headlines as to what actual news they reveal. Nothing had changed since the week prior to these solvency headlines to today; the only revelation was that the financial journalists decided that it was now news. Was it because they didn't have anything else to write about? Maybe more simply, questioning a company's solvency sells papers and sells TV ads. As an investor, of course, you need to question the value of that information.